The study recognizes the obvious shortcomings in China's environmental performance. However, it argues that it is insufficient to focus exclusively on either enforcement problems or the design flaws of individual policies. By contrast, the study identifies some of the macroeconomic and institutional factors that constrain the ability of policy makers to effectively address China's environmental problems. In particular, the study points to the extreme decentralization of the Chinese bureaucracy which has local authorities deal with environmental problems that extend far beyond their own territory. Moreover, the regulation of loss-making state enterprises poses numerous problems. Many local authorities are operating on a tight budget and are unable to sufficiently subsidize such enterprises to ensure their compliance with environmental targets. The fact that loss-making enterprises have private information about their abatement costs aggravates the situation, since it gives the enterprises an opportunity to capture information rents from the regulator. Finally, the application of clean technologies in loss-making enterprises proves difficult because of the great informational asymmetries involved.